How investment funds’ “greenwashing” hurts the planet
A new paper suggests that funds claiming to target climate change may do more harm than good
![Cow in a field with electricity pylons behind](https://cdn.mos.cms.futurecdn.net/shEoz8Av6QUK7hjr3Tv7DS-415-80.jpg)
Want to do your bit for the environment? Don’t invest in a climate change fund. That’s according to a new paper – Doing Good or Feeling Good? Detecting Greenwashing in Climate Investing – by researchers Noel Amenc, Felix Goltz and Victor Liu at French business school Edhec. As Steve Johnson notes in the Financial Times, not only do such funds not help, they may even be “undermining the fight against global warming”.
The authors looked at exchange-traded funds issued in Europe which track various climate-focused indices from major index providers. They found several problems. One is that climate data accounts for a very small portion (a maximum of 12%) of the rationale for including a given stock in an index. Market capitalisation matters far more. In other words, a fund manager can run a “closet business-as-usual” fund stuffed with big companies, but market it as a “green” fund.
A second, related, issue is that a fund can earn a “green” badge by avoiding or even just “underweighting” the dirtiest sectors, such as the energy sector. However, as we’ve noted at MoneyWeek before, pushing listed oil firms to sell their oil fields doesn’t make the oil go away, it just moves it to a less transparent (and often less competent) operator. And as the authors point out, “it will be less easy to greenify the economy by doing away with electricity.” So just avoiding the energy sector won’t help the transition to a greener economy.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
![https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg](https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748-320-80.jpg)
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
This implies that “engagement” – owning shares so as to pressurise company managements to shift direction – is the best option. Yet the study finds that companies whose environmental impact deteriorates over time (by emitting more carbon dioxide, for example) often see their weightings in an index rise rather than fall, implying that these “strategies are basically indifferent to the evolution of climate performance”. As a result, “the investment industry... does little to reallocate capital in a direction and in a manner that could incentivise companies to contribute to the climate transition.”
The study backs what many have already noted about such funds: there is often little clarity or agreement on the methodology or rationale involved. With the sector growing in popularity (assets in sustainable funds tripled in the three years to mid-2021, reports Morningstar), “greenwashing” (sometimes inadvertent) is rife. If you’re still keen to invest in a manner compatible with your views on the environment, then get your hands dirty and build your own portfolio, or at least be sure you know what’s in the funds you choose to buy. For the rest of us, now looks a good time to buy cheap, high-yielding fossil fuel stocks while the wider market’s attention is elsewhere.
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
-
Skipton launches a retirement bond with monthly income – is it any good?
The building society has launched a new three-year fixed-rate bond for those aged 66 and over. Can it boost your retirement income?
By Katie Williams Published
-
Pensions: 140,000 pensioners to be hit by surprise tax demand
Tens of thousands of pensioners will be written to over the summer because their pensions have gone above the frozen income tax thresholds
By Chris Newlands Published
-
Netflix steams ahead of its competitors
Netflix has beaten its rivals, so how can it keep growing?
By Dr Matthew Partridge Published
-
UK mid-caps: an improving outlook
UK mid-caps have perked up and the rally may run further, but long-term investors should remain selective
By Cris Sholto Heaton Published
-
The tobacco industry is going smoke-free - how to profit from it
Tobacco companies have realised their traditional products are on the wane. But new opportunities have opened up – and should prove lucrative
By Rupert Hargreaves Published
-
Is it time to invest in creative industries?
Any industrial strategy should not overlook the creative industries, one of our top national assets
By David C. Stevenson Published
-
Is Mercia Asset Management set for success?
Mercia Asset Management helps the government fund smaller companies in Britain’s regions. Should you invest?
By Rupert Hargreaves Published
-
British stocks set for a boost
British stocks are due for a bounce as the UK looks more stable compared to many economies
By Alex Rankine Published
-
Ocado shares jump by a fifth
Ocado takes a turn for the better after attractive profit forecasts were announced
By Dr Matthew Partridge Published
-
The AI boom is on borrowed time
The hype around the AI boom could be on its way out – but why?
By Alex Rankine Published